We analyse 20 futures markets from four different sectors. We use the front contract and have restricted ourselves to markets traded within the US to ensure the settlement prices are approximately synchronous.

We consider the average absolute correlation between all 20 contracts, and then between those within the same sector, or in different sectors [1]. We display the results from 1973, which is when more than half of the markets have started trading. 

Up until 2008, we find that the average absolute correlation has been fairly stable, with moderate jumps during the early 1980s recession, the 1997 Asian financial crises and the 2002 stock market downturn among others.

Since the Lehman collapse in 2008, we can see an increase, with correlation staying above 30% over a prolonged period of five years. More recently, correlation appears to have returned to “business as usual”, tending towards pre-crisis levels.

The correlation between assets in different sectors follows a similar pattern. This is unsurprising since there are many more between-sector relationships and so this data dominates the all assets result. This increase is present between nearly all sectors, but the most widely publicised change is between commodities and equity indices. While commodities have previously been regarded as a good diversifying asset class to an equities portfolio, this perception has changed in the recent crisis when correlations hit an all-time high. However, as before, this feature appears to be a temporary “blip”.

The correlation between futures within a sector has seen a different trend, with a slow rise over the last 40 years, and less of a marked change during the recent crisis. Markets have become increasingly electronic in the last 20 years, and a potential explanation is that this has created tighter linkages which drive this rise in correlation. Were this true, it would follow that the trend is unlikely to reverse.

We use the constituents of the S&P 500 Index to represent US equities. For each pair of stocks we assess the correlation from the beginning of trading, but only include the figure when both stocks are in the index.

Compared to futures, correlations in equities are a lot more erratic in times of crises. In the late 1980s, for example, Black Monday resulted in a sharp jump with average correlation peaking at about 60%. The jumps during the 1997 Asian crisis, 1998 Russian financial crisis and the 2002 stock market downturn are also more pronounced. The credit crisis in 2008 is an unusual case – as is the case in futures markets, we see increased correlation over a sustained period.

Using the same future contracts listed in Table 1, we also simulate a simple trend-following system in Figure 2. We use a medium-speed system which results in a turnover of six weeks [2]. Over the past 40 years, a portfolio of these 20 systems achieves a Sharpe ratio of one.

The absolute correlation of the returns from these systems are generally lower than the correlation of futures returns. This is an expected ‒ and desirable ‒ property of trend-following systems. Correlation has also been less affected by the 2008 credit crisis than the underlying assets. 

Over the long term, we see evidence of markets becoming increasingly connected, especially within asset classes. More recently, the 2008 financial crisis stands out as a remarkable period – there is, however, tentative evidence that this “blip” is coming to an end.